Effective July 1, 2012, section 50(1) of the Ontario Pension Benefits Act was changed to increase the maximum amount that can be unlocked (i.e. paid in cash) from a pension plan as a “small benefit”. The change allows a pension plan administrator to provide individuals with their pension benefit as a lump sum cash payment if the amount of the benefit is considered small. This is good for plan administrators because it can assist in situations where a monthly pension benefit would be administratively burdensome to administer (e.g. an individual is entitled to only receive a few dollars each month). Also, it could assist in situations where an annuity cannot be purchased for a former member because the amount of his or her benefit is too small.

Prior to the change and subject to the plan terms, a individual who terminated his or her membership in a pension plan was able to unlock his or her benefit if the annual benefit payable at normal retirement was not more than 2% of the YMPE in the year that he or she terminated employment. The amended section now allows a former member of a pension plan to receive a lump sum equivalent of his or her benefit, provided the plan terms permit it, if:

a) the annual benefit payable at normal retirement is not more than 4% of the YMPE in the year that he or she terminated employment; or

b) the commuted value of the benefit is less than 20% of the YMPE in the year that he or she terminated employment.

For example, since the YMPE for 2012 is $50,100, if an individual terminates employment in 2012, he or she may be entitled to a cash payment of his or her pension benefit if the total annual benefit to be provided under the pension plan is not more than $2,004 per year, or the total value of the pension benefit is less than $10,200.

The questions and answers on FSCO’s website provide clarity to a number of issues and confirm the following:

A pension plan administrator can only apply the new higher “small benefit” thresholds if the plan text provides for it. If the plan text still refers to the old thresholds, the old thresholds must be applied unless the plan text is amended. Note that a plan text does not need to provide for the unlocking of “small benefits” at all; it is up to the plan sponsor to decide whether to provide this additional benefit to plan members.

It is fine for a pension plan text to use generic wording to allow the payment of small amounts, instead of referring to the exact percentages that are set out in the legislation.

The new “small benefit” thresholds can apply to former members who terminated their employment prior to July 1, 2012. However, the plan administrator must use the YMPE for the year in which the former member terminated employment.

Only the YMPE in the year the member terminated employment is relevant for the purposes of determine whether a benefit is small.

As many changes to the Ontario Pension Benefits Act came into effect this summer, we will let you know if additional guidance is released by the Ontario pension regulator regarding these changes.

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